Question 4 20 Marks

Indigo Ltd runs a theme park which is currently located at an exit from a major highway. They have been notified that the authority for main roads is considering closing the exit and redirecting the road meaning access to existing park facilities will be more difficult and result the highway will be 2 kilometres from existing park facilities. Construction of the new road will take 2 years. Indigo is considering three options for expansion, two of which involve existing sections of the park Astro Land and Adventure Land and the third involves the establishment of a new section of the park Lego Land which will be located adjacent to the proposed new road and include a direct link to existing facilities Astro Land and Adventure by special park trains. Regardless of the option construction will take 12 months. The company currently has 62% debt in its capital structure. Capital for the project is rationed to $750 000 after which the company will have to raise the rest of the money if needed. The net cash flows for each option are detailed below. The directors work on a 10% required rate of return.

project	Year 0	Year 1	Year 2	Year 3	Year 4	Year5
Astro land	(450000)	85000	180000	180000	200000	210000
Adventure Land	(440000)	80000	180000	190000	190000	200000
lego	(900000)	0	280000	320000	400000	440000

You are required to:

Q1 . Calculateforeachproject:

(i) ARR (ii) Payback period (iii) NPV

Q2 .Present your calculations in a table and rank the projects in terms of best financial outcome.

Q3. What are the investment considerations here? Explain in terms of risk, opportunity costs, finance and other and write a report recommending which project or projects you would proceed with and why?

If a decision is taken to fund projects requiring more than the $750 000 at hand. You are presented with several alternatives:

Q4. Unsecured business loan with either fixed or variable interest rates from the Commonwealth Bank;

(ii) 8% Debentures secured by a charge over assets; (iii) Issue new shares to existing shareholders in the form of a rights issue.

Which method would you choose? In your answer refer to current interest rates and consider the level of fees and risk associated with each alternative.